USD/JPY trims losses and bounces up to 104.70

The US dollar bounced up against the yen on Thursday, after testing an important support area at 104.0.  The pair has returned to the 104.70 area, before losing steam.

USD rallies across the board

The greenback has rallied against its main peers on Thursday, fuelled by a combination of market concerns about the second COVID-19 wave, as Europe moves towards a new series of lockdowns, and the uncertainty about US elections, less than a week ahead of the election day.

Furthermore, the dovish message by the European Central Bank earlier today, with President, Christine Lagarde hinting to further stimulus measures in December, has sent the euro plunging. This has offered a fresh impulse to the greenback, as reflected in the 0.65% rally in the US Dollar Index, which has reached the 94.00 level for the first time since late September.

US macroeconomic data has been dollar-supportive as well. The US Gross Domestic Product expanded at a 33.1% annual pace in the third quarter, which is its best performance since records are taken in 1947, while the Weekly Jobless Claims decreased beyond expectations.

USD/JPY seen at 103.00 by year-end – CIBC

From a wider perspective, however, the FX strategy team at CIBC remain s negative on the USD, expecting the pair to extend its mid-term downtrend: “Although we have seen 10-year UST-JGB spreads push wider since troughing at around 50bp in early August, we have yet to see spread moves have a material influence on JPY valuations. There are several key influences at play here. Firstly, the cost of hedging for Japanese investors has diminished sharply as short-term rate differentials have collapsed. Secondly, the destination of bond purchases has changed, away from the US, with Australia proving to be a major beneficiary. Finally, although nominal yield spreads may be widening, when inflation is taken into account, real spreads at both the front and longer ends (2yr and 10yr) have moved sharply into negative territory. Absent real yields spread moving back into positive territory and impacting potential net bond outflows, we maintain USD/JPY downside targets.”

Technical levels to watch